Saving for college is a big task for parents to take on. The price of college tuition keeps rising at an overwhelming rate that can be hard for most people to keep up with. “If prices keep rising at the current rate, students who don’t receive any grants will most likely pay more than $115,000 to reach graduation day. Those who do receive scholarships or other assistance will most likely pay about $87,000. Thirty years ago, when the total sticker price of a year at a public university ran less than $3,000 and students took less time to graduate, the total cost of a degree
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was closer to $12,000.”(US News) It is important for parents to take precautions ahead of time and begin saving so that they are not caught off guard. Scholarships and grants are not always guaranteed.
So what options are out there?
1. Taxable accounts are one option that parents can consider while saving for their child’s college education. These accounts earn interest and there are no limits on the amount you can add into it. Also, there are no restrictions on the kind of investments you use the money for and there are no required withdrawals. “The one drawback is that you will owe taxes each year on any account earnings and on any capital gains, or profit from selling an investment for more than you paid for it.” (HSBC) One way to get a tax break on the account is to set up a custodial account. A custodial account would be in your child’s name but they would not be able to access the money until they turn 18. All transactions with the account will be under your supervision since you will be acting as custodian on the account. “You’ll get a tax break on the first $1,500 of investment income until your child reaches 14, at which point investment and income is taxed at the child’s tax rate, which is usually lower than yours.” (MSNBC)
2. Concerned about having to pay taxes? Consider opening a Coverdell Education Savings Account (ESA). “Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.”(IRS) Limitations for these accounts include a limit of $2,000 a year and an income-based limit. If the parent earns more than $110,000 then they are not eligible.
3. A 529 Plan is another option for parents to look at. 529 Plans are savings plans that are available through every state. Any person can apply for them however most offer perks for state residents. The funds are tax free and can be used for any college. “The tax advantages of these plans are currently set to expire in 2010. Congress has recently moved to make those tax advantages permanent. But until those changes become permanent, there is a risk that 529 withdrawals after 2010 could be taxable.” (MSNBC)
4. Scholarships are a great way to fill in the gap for tuition prices; Church Hill Classics offers five $1000 scholarships. Check out this link to learn more.
Looking for more tips on saving for college? Go to these websites: